+1-415-670-9189
info@expertsmind.com
Determine the share price and corporate tax rates
Course:- Finance Basics
Reference No.:- EM1349709




Assignment Help
Assignment Help >> Finance Basics

Company A and B are two identical companies with equal asset values of $50 million. Company A is financed by equity only and has 100,000 shares outstanding. Company B has perpetual risk-free debt in its capital structure with a market value of $20 million. Company B also has 100,000 shares outstanding. The risk-free rate is 1%.

(a) Assume that there are no taxes. What is A's share price? What is B's share price?
(b) Can you create a portfolio that mimics the risk-return profile of Company A (1 stock of Company A) and consists of the risk free asset and Company B's stock? If yes, describe the portfolio.
(c) Company B wants to achieve its long-term target Debt-to-Equity ratio of 0.5. How much debt or equity does Company B have to buy back? Calculate the value of the debt and equity after the buy-back.
(d) Let's consider that the corporate tax rate is 35% (assume that the levered value of Company B is still $50 million). Analyze the scenario in part (c) with corporate tax rates. What is the value of debt and equity after the buy-back in part (c).
(e) Why are the market values of debt and equity different in parts (c) and (d)?

 




Put your comment
 
Minimize


Ask Question & Get Answers from Experts
Browse some more (Finance Basics) Materials
jackson electricals has borrowed 27,850 from its bank at an annual rate of 8.5%. It plans to repay the loan in eight equal installments, beginning in a year. what is its ann
What is the general relationship among operating leverage, financial leverage, and the total leverage of the firm? Do these types of leverage complement one another? Why or wh
Stan Fawcett's company is planning producing a gear assembly that it now purchases from Salt Lake Supply, Corporation Salt Lake Supply charges $4 per unit with a minimum order
We learned in the class that when put call parity relationship is violated, an arbitrage opportunity will arise. You will use this case to illustrate if you can find an arbi
To support your growth, you need to purchase some long-term fixed assets. You are considering whether to buy or lease. Why might a financial lease be especially attractive f
1. Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in the United States and 5.3% in Germany. In the spot market, 1 euro equals $1.40. What
What is your overall opinion of this company based on the limited analysis completed via the four ratios? Feel free to mention any questions that you feel should still be co
Expected return % Standard deviation % b. If Treasury bills yield 2.5% and investors believe that the stock offers a satisfactory expected return, what must the market risk